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Afferro Mining - 1.2bt Indicated Iron =

I looked at Afferro (LSE:AFF) in February when the company was consolidating following a move higher based on a potential takeover by IMIC. However, due to a lack of progress on the takeover front, traders have fled the stock and the general mining market malaise has led to a strong downward trend being formed. In my initial article I noted how a sensible approach to play Afferro would be to take a 30:70 split approach with 30% prior to the partnership/takeover news and 70% following the drift afterwards (in the negative scenario) The reality is that Afferro is now a liquid cash-rich company. With cash - payables amounting to ~£57.0m and a market cap of just £61.8m, the company has slid from the 81.25p initial review price to 58.88p currently. The time for the additional 70% may well have arrived.

The technical position of Afferro is quite bearish. The downward trend is still in full flow and it has been sustained through numerous rises in the wider market. This is somewhat negated by a range of oversold indicators though. However, you would expect a point around the current level where investors would be happy to re-invest based on the earlier spike up. If the 60p level is re-surpassed tomorrow, this could act as the necessary support that has been lacking between 60p-100p. The catch with this is that, even though the chart is slightly bearish, the share price can only fall by another 4p to reach pure cash value. This should effectively act as natural support for the stock and it would be surprising to see it fall past this level considering the liquidity of the stock. Thus it can be derived that the potential downside here is limited from a fundamental perspective.

A series of news statements have been released since the first write-up. The first of these included an announcement that capital expenditure (CAPEX) could be reduced following a series of assessments at Afferro's Ntem project. CEO Luis da Silva commented: "These outstanding results highlight one of the key attractions of Nkout- its
metallurgy. Bench-scale testing of the 28t of material has been completed to
schedule and confirms and increases confidence from earlier results. We feel
this sets Nkout apart from other projects in the region." The RNS also noted that infrastructure scoping results would be released prior to the end of Q1 2013 although this has now elapsed. Supposing the initial timescale was realistic, an announcement on this front could be forthcoming. This will be of importance.

An update on the corporate front was issued shortly after this with confirmation that talks with Jindal has been terminated as preliminary discussions led to Afferro feeling undervalued compared to their market capitalisation at the time. In addition 'talks with IMIC and other potential strategic partners were ongoing'. As expected, the shares dropped sharply on this news due to short-term traders fleeing. The lack of positive news since combined with a weakening mining sector has led to the continued decline.
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Later in February, further extensions of the Nkout project were defined following further exploratory work. Intercepts reached up to 60% iron ore and it was said they could be exploited through a 'low-cost simple processing solution'. Following on from this Afferro announced that it had signed a Memorandum of Understanding (MOU) with Korea's POSCO, a multi-national steel maker.

courtesy of hans s on flickr

"The MOU with POSCO Africa is a potentially transformational step in the
continuing development of our high quality and strategically located portfolio
of iron ore assets in Cameroon. The MOU is an endorsement of the work we have
undertaken to de-risk our asset base and establish a platform from which to
enter the next stage of our development. POSCO has extensive expertise in developing iron ore projects and related
infrastructure, and an existing presence in Africa, making them an ideal partner
to work with us to unlock long term value from our project portfolio."
The market once again did not take much interest in this statement despite it being a potentially significant milestone for the company. Clearly the infrastructure in the region is still lacking, so Afferro will need external help. The two parties are seeking a definitive agreement which will be worked upon during Q2 2013. More positive results from Ntem were released in late February with the timescale for the scoping study confirmed as Q1 and other results due during Q2. If the transport scoping results are positive, this should have a significant impact upon the share price considering that a lack of regional infrastructure is a key reason why the share price is being held back.

The last RNS was released today and it concerned the full year results for the company. The following points were of interest:
- Cash and short term deposits of £58.8m. With deposits of £17.2m the interest is likely to pay a significant proportion of the board's salary alone. The cash is sufficient to meet planned expenditure for two-three years.
- The company has no debt
- The rail corridor which has been proposed for the transportation of iron ore in Cameroon runs from Sundance Resources Mbarga Project to the port site at Lolabe south of the deep water port of Kribi, a distance of approximately 516 km and runs only 30 km south of the Nkout Project. Afferro has received verbal assurances from the government that it will receive access to this dedicated iron ore rail line and port facilities which will be scaled up for all users. The financing of the railway is yet to be agreed but it is expected that it will be funded, built and operated by an integrated infrastructure company with the Government and mining companies, including Afferro, as stakeholders. The rail and port infrastructure will be scalable for a potential demand of 105 mtpa of iron ore product. The Company is progressing a Framework Agreement with the Government setting out the key principles for the development of the Nkout Project. In its discussions with potential strategic partners Afferro is considering advancing its own rail corridor plans, starting from Lolabe where the iron ore terminal is to be built, to the Nkout Project. (News about Sundance's takeover potentially falling through has been released recently which could also be a reason for the falling share price)
- The 2013 outlook included the resolution of talks between POSCO and IMIC to identify a strategy to exploit the resources at Nkout in particular

IMIC also released their latest set of results at the end of March. Within them they confirmed their 5% stake in Afferro and also announced that they had hired Merrill Lynch to advise them on a possible offer for the entire share capital of Afferro, "which [they] believe has an attractive asset in the Nkout iron ore project." Due diligence regarding this is ongoing, but considering the ever-slipping share price it is perhaps becoming increasingly likely that IMIC will launch an offer at a level not too indifferent to those seen over the last six months.Once again it is important to recognise that as it stands, Afferro is a cash shell with assets that are being assigned negligible value.

Once you strip the cash out of the market cap it shows that the market is currently valuing Nkout, Ntem, Akonolinga and Ngoa at just £4.8m. Considering Nkout alone has an indicated iron ore resource at 1.2 billion tonnes then valuation is simply ludicrous as backed up by brokers share price targets far exceeding the current share price. The latest two revisions came in late February from SP Angel and Panmure Gordon who set targets of 225p and 279p respectively. With a maiden Ntem resource estimate due during Q2 (albeit it won't be as large as Nkout it will add to the value of Afferro), Nkout metallurgical test results and infrastructure scoping study around the corner, Afferro looks completely undervalued. To put it a different way, if Afferro sold all its assets tomorrow, its market cap would be far less than the value achieved. Although the mining sector is still poor and iron ore prices are still expected to weaken further, there are simple measures of how cheap a company is and the very high cash:market cap ratio should limit the downside here to around 52p in the short term. Time for the other 70%.

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